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Ladies and gentlemen, thank you for standing by, and welcome to the X5 Q2 and H1 2018 Financial Results. [Operator Instructions] I must advise you that the conference is being recorded today, Tuesday, the 14th of August 2018. And I'd now like to hand the conference over to your first speaker today, Head of Investor Relations, Andrey Vasin. Please go ahead, sir.
Good morning, and good afternoon, ladies and gentlemen, and thank you for joining us on this call where we will discuss X5 financial results for the second quarter and first half of 2018. Speaking in the call today are Igor Shekhterman, X5 CEO; Svetlana Demyashkevich, our CFO; and myself, Andrey Vasin, the company's Head of Investor Relations and Market Analysis. I'd like to remind you that we disclosed the press release this morning via our website, the RNS, and our own e-mail distribution list. Both the release and the presentation for this call are currently available on our website in Investor Relations section. Before we start, I would like to draw your attention to the fact that some of the information announced during this call may contain projections and forward-looking statements regarding future events or the future financial performance of X5. Please refer to the beginning of the presentation for a full disclaimer with regards to such statements. I will now pass the floor to Igor, who will take you through company's key results and achievements.
Good morning. Thanks, Andrey. And good morning, and good afternoon, ladies and gentlemen, and thank you for joining our call today. The key topics I would like to cover today are highlights of the company's key achievements in the first half of this year, the key initiatives we are focusing on at the moment and also say a few words about our future plans. After that, I will pass the floor to our CFO, Svetlana Demyashkevich, who will discuss the external environment and provide more detail about our financial results. After that, we will be ready to answer your questions. So let's start with the key achievements. X5 continued to grow revenue at a strong pace of 19.6% year-on-year in the first half of this year. We achieved this despite food inflation deceleration to record low level. We also remained the fastest-growing public food retailer in Russia for the third year in a row. Like-for-like sales and traffic in the first half of this year reached 0.8 and 0.1, respectively. I would also like to point out that both indicators grew in the second quarter after a decline in the beginning of the year. We made significant efforts during the second quarter to achieve positive like-for-like performance. The adjusted EBITDA margin in the first half of this year was [Audio Gap] year. We continue to prepare the company for the future in terms of innovation, big data and omnichannel sales. We have already identified the key areas for our development strategy. Now we are working on detailed road map for the development and implementation of projects in this area. The company continues to develop its loyalty card programs. The total X5 retail format has around 30 million active loyalty card user at the end of June. Penetration and traffic in June reached 41% at Pyaterochka, 44% at Perekrestok and 74% at Karusel. We are working actively develop the commercial function, including the development of direct impact strategic partnership with supplier and private label. We continue to develop our online business for Perekrestok online where the number of orders in the first half of this year reached 116,000. Now I would like to talk about a few key areas where our business is developing. First, I would like to give you an overview of the changes in our management team. As you know, the first half of this year saw some important changes in the company's management team with the appointment of new General Director for the Pyaterochka and Perekrestok retail chains. FIVE has always been known for having a strong succession pool. As we stated before, our goal is to promote candidate from our internal pool to key vacant position while also continuing to address highly quality professional from the market. In June, Sergei Goncharov was appointed as a General Director of Pyaterochka while Vladislav Kurbatov was promoted to General Director of Perekrestok. Sergei has excellent track record in strategy, brand management, operational management and retail business development. He's had significant experience in building client-oriented businesses with a focus on efficiency, which he demonstrated in his previous position, where he was responsible for the drug reformat as well as the development and launch of a new concept for the pharmacy format. I'm confident that with his strong professional skills and high personal motivation, Sergei will introduce new approaches to strike the right balance between Pyaterochka growth with focus on efficiency, quality and returns.Vladislav joined Perekrestok as Operational Director in 2015 at the very beginning of the supermarket format transformation. He has already made a huge contribution to Perekrestok's successful expansion and, in particular, to developing the current customer value proposition, making in-store process more efficient and strengthening the format's focus on customers. He also played important role in the launch of our regional supermarket model and increasing sales densities in Moscow. Vladislav's 12 years of successful operational management experience at Perekrestok and as a food retailer, combined with his excellent understanding of our customer, helped the Perekrestok team to complete the transformation of the business successfully. Johannes Tholey, the new Commercial Director at X5, is another valuable addition to our team. He also has more than 30 years of experience in retail, having worked for major international company, including as CEO of Globus in Russia. Johannes will be responsible for developing the company's commercial operation and foreign trade and improving the quality of the product mix across the chain. Now I would like to touch some of the key achievements across X5 formats. Pyaterochka continues to record revenue growth rate of above 20%, which is ahead of its peers. In the second quarter, like-for-like sales and traffic returned to positive territory, thanks to more favorable weather condition and management initiatives. I would like to comment on the latter in more detail. While for 2 months I was acting as the General Director for Pyaterochka, I found a number of issues that Sergei Goncharov and his team will need to address. We will focus on operational excellence, including reducing shrinkage, redesigning in-store business process and decreasing staff turnover rate, adapting the product offering and promos to the local needs of customer and ensuring the healthy and balanced growth of the chain with a focus on up-to-date CVP and, of course, on our customer. We started doing a lot to decrease shrinkage. The Moscow macro region recently saw the launch of our shrinkage technology. We plan to roll out this initiative to other macro regions. Key efforts to reduce shrinkage included adjusting the offering to suit the store formats, cutting inventory, effective promo plan and control, identifying temperature issues during storage of transportation of goods. Also, we'll improve logistics business process, including the system for remote quality control of fruit and vegetables. These initiatives are expected to generate a positive effect next year, but we also expect to see certain improvement by the end of the current year. We have begun transforming the format's management model to make it more sustainable. The number of executives reporting directly to the Pyaterochka General Director has been reduced from 21 to 15. Pyaterochka's rapid growth required the [ formation ] of another at macro region level, which will take on the full scope of operational management, letting the headquarter to focus on strategic priorities, setting goals and monitoring progress. As part of the transformation, 6 macro regions have been established and headed by director reporting to Pyaterochka's CEO who are all internal candidates with excellent track records. This will also accelerate decision making and streamline local promotions and assortment management to better adapt stores to regional markets, especially in the fresh and fruit and vegetables categories.Low engagement and loyalty amongst store personnel results in higher turnover rate, which also negatively affects shrinkages and store operation. We have developed a plan to streamline store management and recruitment and also introduce a new incentive system for operational staff. The healthy food trend is gaining traction in Moscow and St. Pete with more and more customers attract by the unique product offering. In [ Europe ] [ fresh food ] stock are becoming increasingly popular. In Moscow, a pilot project was launched to adapt the product range, reflecting the clustering of store based on their location, consumer behavior and income. This year, in partnership with [ Handby ], X5 completed a project where customer niches and customers were segmented. This and next year, we plan to adopt our CVP for the group of stores identifying with [ Handby ], which will allow us to make the CVP more relevant for our customers. We are making considerable efforts to develop original Pyaterochka model focusing a lot on our stores, including adapting the product mix to customer needs in a region and improving business process. We are going to cut capital expenditure on open original stores. We will also review our private label management principles, including product quality, especially of co-label with Pyaterochka [ Krasnodar ]. We have introduced new products in line with the local needs of customers and revised the pricing strategy. Perekrestok continued to perform at an outstanding level, ahead not only of indirect peers but also of X5 as a format. In the first half of this year, net retail sales grew by 22.8% year-on-year, the highest amount X5 [ format has ]. Like-for-like traffic also showed the strongest growth at 4.9% year-on-year. We continued to refurbish our supermarkets. The first half of this year saw the completion of the refurbishment at 13 Perekrestok stores. As of the end of June, over 77% of Perekrestok operated under the new concept. To address our customer needs, the format has a special focus on the fresh category. Perekrestok saw the highest NPS in fresh meat, fruit and vegetables and also ranked high in dairy products.Following the developments of [ Pyaterochka ] store in Moscow, Perekrestok launched its own brand of product with the ultra-short shelf life called Green line. In Moscow, we run the product jointly with suppliers of [ Kosville ], while in St. Petersburg, Perekrestok uses in-house capability. Some of our Moscow supermarkets already feature special lanes with this product. We plan to expand the Green line series to 200 product items going forward.Karusel recently rebranded the Karusel chain, including an update of the logo and brand concept. Changing the logo and brand concept of Karusel is a continuation of the growth and updating the format positioning. Following the pilot store in St. Petersburg, this April we opened the second Karusel hypermarket as a new concept in Moscow region, town of [ Sergeypassat ]. The pilot store concept was improved and included an enhanced store layout, more convenient equipment and navigation as well as a new visual and corporate style. We have started actively refurbishing the hypermarket in accordance with the new concept while Karusel hypermarket was opened following refurbishment in the first half of this year, and 6 further store will close for refurbishment and will reopen in the third or fourth quarter of the current year. I would also like to share our plans for increasing the quality of our products. In line with the latest market trends, the quality and variety of fruits and vegetables mix has now taken center stage. We must bring the best product from this category for our consumer by the optional price. We started actively developing direct import, which will improve our procurement terms, raise the quality of our format offering and mitigate the risk of supplier shortage. Currently, direct import accounts for roughly 3% of all suppliers, and our target for the next 3 years, to reach 10%. Next, I would like to comment on a key innovation in big data. We continued to improve our IT infrastructure in line with 2020 road map approved in the summer of last year. We focus preliminary on improving the stability of our IT infrastructure to support strong organic growth and making our IT process more efficient. In June, we started the pilot around of Pyaterochka based web store with the goal of fast-tracking implementation of new technology across X5 stores. The first working group responsible for specific focus area have already been launched. The development of our IT systems we'll enhance with innovation as we see the underlying innovative technology as the main driver behind the company's future success. As Russia's #1 food retailer, we aim to lead the ongoing transformation of the industry by using big data and developing automation, omnichannel technology and other new ideas, which will enable us to better meet customer needs and grow our business. In terms of our omnichannel growth, we continue to actively develop online sales of the Perekrestok web store. This segment is growing strongly with the number of purchases from both existing and new customers continuing to increase. The number of orders per day reached 850 in July, increasing from 700 in the second quarter of this year. This year, we expanded our footprint beyond Moscow to cover some parts of the Moscow region. The second web store in Moscow is set to open in the near future, while the St. Pete debut is scheduled for the end of this year. Since the launch of the online platform, the average net retail revenue of online and off-line customer in Moscow has increased by 1.7x, while the average NPS in the second quarter of this year reached 82%, significantly above of our full year target of 73%. As you may know, a special big data department has been established at our company. With the big data strategy drafted and several pilot projects launched, we are now working to build the right management team, and we already have the infrastructure we needed to launch projects. To conclude, I would like to highlight our priority and forecast for the second half of this year, which are: continuing to execute on our business plan; focus on optimizing operating cost on the back of continued consumer rationality and intensifying competition; adapting the assortment and service at shops in accordance with market trends and consumer needs, especially in Moscow; improving the quality of the fresh category, especially fruits and vegetables, and adding new position in the product range; increasing NPS level across all formats; developing supporting infrastructure to support rapid growth of the businesses, including future development of logistics and IT; developing detailed road map for innovation products across X5 retail group and expanding the big data division to further improve the efficiency of the business in all areas; continued implementation of the format goals. Pyaterochka: focus on improving the operational efficiency of the business, including by reducing shrinkages, improving the quality of business process and level of services; reducing staff turnover; and enhancing supply in the category of fresh and fruit and vegetables. Perekrestok: developing the regional model and online business and adding unique assortment. Karusel: rolling out the refurbishment program across the whole chain and increasing sales density. As for our forecast, we can confirm the opening guidance for this year announced earlier this year and continue to expect around 2,500 gross open across all formats. Now I would like to pass the floor to our CFO, Svetlana Demyashkevich, who will comment in more detail on the company financial results for the second quarter of this year. Thank you for your attention.
Thank you, Igor, and good morning, good afternoon. [Audio Gap] For joining the call. Let me start with the external environment. Then I will give an overview of some of the key trends in our financials and also provide you with some insights on our quarter-to-date results. So to begin with, I will say a few words about the external environment. Food inflation continued to decelerate to new low in the second quarter of 2018. From 1% in the first quarter, it dropped to 0.4% in the second quarter of this year. The growth rate of food product turnover accelerated towards the end of second quarter of 2018, but it's too early to speak of trend towards accelerating demand growth. The rate of growth in demand for food products still looks weak relative to higher wage growth rates. A stable recovery in demand is limited by unstable real disposable income dynamics. After a short period of growth in February and -- through April, in June the growth rate slowed to 0.2% year-on-year. Consumer behavior during the period remained rational and sensitive to promos. The consumer confidence index remains negative at the same level as in the first quarter of 2018, around minus 8%. We realize that we're operating in a highly competitive market with several strong players in every segment. Major retailers continue to add space, increasing competition. In addition, we are seeing growing pressure from specialists in Moscow. In this regard, we must continue to focus on operational efficiency and cost control. This remains our key priority for 2018.Moving on to X5 financial performance. During the quarter, our revenue increased by 19.3% year-on-year to RUB 383 billion in the second quarter of 2018 despite decelerating inflation. Looking at margins. In the second quarter, the gross profit margin increased by 11 basis points to 24% of revenue in the second quarter of 2018 due to stable share of promo and positive impact on the commercial margins from proportionally more sales coming from Perekrestok, the share of which reached 14.5% of net retail sales in second quarter 2018. The negative effect from SG&A year-on-year was due to increased stock costs, lease expenses and utilities costs. All the factors affecting SG&A expenses are described in our today's press release, so I would prefer not to go into details right now. The adjusted EBITDA margin totaled 7.7% in the second quarter of 2018, and we are in line with our business plan for the first half of the year. In second quarter 2018, we continued to accrue LTI expenses covering the previous new LTI programs. The LTI expenses accrued for previous program totaled RUB 450 million, and for the new program, RUB 148 million.Depreciation and impairment costs increased as a percentage of revenue by 25 basis points to 3.3% versus 3.1% for the same period last year. This was due to continued growth in the share of assets with shorter useful life, driven by growing share of leased space in X5's totaled real estate portfolio. In the second quarter of 2018, net finance costs increased by 8.2% year-on-year. The effects from increased level of gross debt was partially offset by the decreased weighted average effective interest rate of X5's total debt as a result of declining interest rates in Russian capital markets and actions undertaken by X5 to minimize interest expenses.X5's effective tax rate for the quarter totaled 25.1%, driven by deferred tax on investments accrued in second quarter 2018 associated with potential dividend payments for 2018.The company's net profits in the reporting period totaled RUB 8.7 billion, which represents 2.3% of revenue.Turning to our balance sheet. At the end of second quarter, our net debt-to-EBITDA ratio increased to 2.18 but, according with the company's business plan, should gradually decrease during second half of 2018.Turning to the cash flow. The change in working capital in the second quarter of 2018 was negative RUB 8,126,000,000 compared to minus RUB 11,873,000,000 reported in the second quarter of 2017. This was due to seasonal decrease in accounts payable and the reduction in accounts receivable due to VAT deductions driven by transition to more effective interaction with counterparties. However, a large increase in inventories in the second quarter of 2018 compared to the second quarter of 2017 was driven by growing share of regional stores with lower turnover. Net cash used in investment activities, which generally consist of payments for property, plant and equipment, increased to RUB 23.8 billion in the second quarter of 2018 compared to RUB 19.1 billion for the second quarter last year. This change was primarily related to acquisitions as we completed partial payment for a key supermarket business and the acquisition of Polushka stores in Bashkortostan. I would like to say a few words about CapEx. X5's total capital expenditure amounted to RUB 20.4 billion compared to RUB 19.9 billion in the second quarter of 2017. Approximately 60% of CapEx in the second quarter went to expansion of our store base, around 9% to refurbishments, the rest to logistics, IT and other. Finally, I will give a short update on the quarter-to-date results before we go to a Q&A session. X5's net retail sales quarter-to-date increased by around 18.7% while like-for-like sales rose by 1.1%. With that, I would like to conclude the discussion of our results. Thank you for attention, and we're ready to take your questions.
Ladies and gentlemen, this concludes our presentation. We are now ready to take your questions. This session will last approximately 30 minutes [ Operator Instructions ]Operator, can we have the first question, please?
[Operator Instructions] And your first question is from Brady Martin from Citibank.
I just had a question on the tax rate. So the tax rate ticked up again in Q2, about 25% now. I understand that, that was due to some just kind of provisions for dividend payment or something. Just wondering, in an environment where -- if you envision paying dividends on an annual basis, should we expect a tax rate -- a sustainable tax rate at this level is 25%? Or is there something that you can do to bring it down to -- closer to the statutory rate of 20%?
And thank you for your questions. Actually, yes, it's a structural change. You know that this year, for the first time, we paid dividend. And that's IFRS. We need to accrue deferred tax on this payment of dividend and future payments of dividends because we do expect that we will continue to pay dividends as we now have the dividend policy. So of course -- so if you look at the effective tax rate without this impact of deferred tax accrual, then the rate is at the level of our normalized effective tax rate. So no major changes within our operational business and operational managing of tax, but just structural change related to dividends. Yes, I would expect that the level of tax rate -- effective tax rate in future when we will continue to pay dividends will remain at pretty much the same level.
So, I mean, do you -- so you think the sustainable level for the company on an annual basis is something like 25%? I think before the -- before you were paying dividends, the outlook was something like 22%. Is that -- do I understand that correctly? Now we should be expecting something like 25%?
As you know, we do not give guidance in terms of our profit numbers and including effective tax rate. I think I explained the structural change. And of course, we are managing our tax and doing our best to decrease our tax effective rate. But at the same time, we're a big company, of course, and we do pay tax. That's normal practice.
Okay, my -- I mean, maybe I can rephrase the question. I know you don't want to give guidance, but the statutory rate in Russia for your company is 20%. Your -- the first 2 quarters, you're recognizing 25%. So is this a more -- I mean, just asking, is this a more reasonable expectation in the medium term for you to pay? Or do you think you can -- is there something you can do to reduce it closer to the statutory rate? Do you have any, I don't know, any kind of tax optimization strategies to reduce the tax rate? I mean, I think many investors would be disappointed to get a 2% or 3% dividend and suddenly realize that your tax rates -- your effective tax rate has gone up 500 -- 300, 500 basis points. It seems kind of counterproductive. That's my question. I don't need you to give me the exact rate. Is there something you could do to reduce that?
So as I said, [Technical Difficulty]
So continuing to answer the question on tax rate. Our more or less stable level of effective tax rate is around 22%, 23%, and the rest is coming from the newly accrued deferred tax on dividend. So this difference will remain. Of course, we're using all our possibilities to decrease the tax rate. But of course, we're not using any tax optimization schemes because we don't think it's appropriate. So yes, we would expect that structurally, if we want to pay dividends, we'll need to pay this additional tax.
And your next question is from Natasha Zagvozdina.
I'd like to hear the clarification on the store openings. Did Igor say 2,500 new stores across all formats?
Yes, you're absolutely right. It's 2,500 across all our formats. Thank you for the question.
And that is net of closings or it's gross openings?
Gross.
Gross openings. It's gross opening, 2,500.
Did we at some point -- I'm not sure that I got it right before then. Did we at some point have 2,700 stores as your openings target?
No, no.
No, no.
The guidance from the very beginning from our call in March was 2,500. So we're not changing it.
Yes, it was the same number we indicated in our previous calls.
And then your CapEx guidance of RUB 80 billion to RUB 85 billion plus-plus, and on top of that possibly M&A also remains unchanged?
Actually, our guidance regarding CapEx was almost the same level we had in 2017 also depending on M&A activities, which brings us closer to RUB 90 billion. So also, we're not changing the guidance. So nothing really changed in that respect.
So RUB 90 billion would be inclusive of the M&A that you partially accounted for in the first half, the payment for which?
Well, again, depending on M&A activities, it's plus/minus RUB 5 billion, I would say.
Your next question is from the Maryia Berasneva from Morgan Stanley.
My question -- my first question is with regard to the EBITDA margin. Previously, [indiscernible] said you said that you target 7%-or-higher EBITDA margin for the full year. Do you feel comfortable with that target? And do you see any structural reasons for the margin to be substantially different in the sort of second half to what we have seen in the second quarter?
Thank you for your question. And actually, you might remember that during the previous calls we had in the first half of the year, we indicated that we do expect in different scenarios, even with different levels of inflations, EBITDA margin coming to the level of 7%-plus. And now we see the results of the first half. We are in line with our budget, in line with the plan. And we do expect that the second half will be also in line with our plan. We'll see how the competition and inflation evolves, but we're still quite comfortable on achieving those targets for this year.
Okay. And my second question was on Pyaterochka store openings. Firstly, I see that you have closed 212 Pyaterochkas in the first half. If my calculations are right, it equates to around 16% of the gross openings. Should we expect this rate of closures to continue in the second half? And what is driving the higher rate of closures so far this year? And in that context, when we look through 2019, do you have any thoughts on what number of stores would you like to add next year?
To start, let me start and Svetlana will proceed. So we haven't at the moment any guidance regarding the opened -- the opening for the next year. I think we will have it in the end of the current year. Regarding the goal in the number of the store, it was not where our expected opening in the last years. And it's the reason why we closed the stores to the number you indicated, stores in this year.
Actually, in the beginning of the year, understanding tougher external environment, macro environment and competition, we took several steps to increase our efficiency. And within that, we also analyzed all store openings of last year and made a decision of more impressive closing of nonperforming stores. So that resulted in higher rate of closings in the first and second quarter. But of course, it's positive for our results in the second half of the year. We do not expect such high rates of closings in the second half of the year because we did this exercise mostly in the first half.
And your next question is from Marat Ibragimov from BCS.
My first question, on traffic turnaround in Pyaterochka stores. In the second -- in first quarter, it was deeply negative, minus 2.2. In second quarter, it was plus 1.3. What drove that traffic turnaround? Can you please explain?
I would say it was a mixture of external and internal factors. When we're talking about external factors, the trends of temperature regimes in the second quarter -- comparing to the second quarter of 2017 and first quarter -- comparing to first quarter of 2017, the trends were very different. So if we're talking about the first quarter, it was abnormally cold. So that affected, negatively, traffic. At the same time, the average check was higher comparing to 2017. And then the situation changed in the second quarter of the year, where the temperature was generally higher, and that drove higher traffic in the stores but less average check. So more small purchases. Secondly, and we're constantly doing that, but there was a special exercise also in the beginning of this year to start adjustment of assortment in Pyaterochka, more -- providing more appropriate assortment for the local needs of the local customers, including Moscow. A lot of attention is now - is paid to Moscow as one of our core regions -- probably the core region and the more revenue-bringing region. We did see negative trends in the fourth quarter and first quarter of the year in Moscow, so we are trying to reverse them and a lot of work was done in the second quarter to do that. So we do already start to see some results. And also, as you heard, Igor was talking about the processes we're doing now and the efforts which are taken by Perekrestok's management and Pyaterochka's team also to improve situation with business processes, attract more customers in the store, adjust assortment to local needs, et cetera, et cetera.
And also, I would like to add that the launch of our macro region model give us more opportunity to adopt the local assortment.
Maybe it would make a lot of sense for you to do -- expand the exercise on Karusel stores because Karusel drastically continues to be negative. Maybe it could help other markets to deliver the similar turnaround?
I think one of the reasons of negative traffic of Karusel, it's general situation with hyper. And the second, we -- as I mentioned in my speech, we closed 6 hypers at the moment for their reconstruction. It is one of the reason of negative traffic for Karusel. And it's also our main target in the Karusel to improve or increase average basket.
Okay. And my last question on LTI cost. It dropped quite significantly in second quarter year-over-year. Can you please give some guidance on a full year figure? I understand this cost now includes only LTI under second phase, so -- but I would expect that -- or I thought or in fourth quarter of this year, you'll start to include costs under the third phase of LTI.
Well, actually, this present accrual includes accruals on old LTI program and new LTI program. The biggest accrual is still on old LTI program, and -- if you compare the structure of these kinds of the accrual. But still, it's decreasing in accordance with the schedule we're also talking during our previous calls because it's the last phase of payments of the old program. At the same time, it's very beginning of the new LTI program as the probability of us achieving all the goals is still quite [ low ]. That's why the amount accrued for the new LTI program is not that high.
You have not elaborated the LTI -- the program yet, am I right?
We start to accrue the new LTI program, partially, depending on the probability of achieving the targets in 2020.
And can you please remind us or tell us what's the KPIs for LTI? Are they 3?
This new program includes 2 major KPIs, leadership in revenue among Russian public food resellers. It's the first KPI, the same we have for the old program. And the second KPI is leadership in our multiple, EBITDA multiple, also leadership within the Russian public food retailers.
And your next question is from Yulia Gerasimova Goldman Sachs.
First question for me is -- would be about the Magnit refurbished format. I'm sure you were aware that the company has launched kind of the new concept of the refurbishments. And though there's little number of stores have been opened, I was wondering whether some of these stores have been opened next to your existing X5 stores. Have you seen this new format? And what was the impact on the stores? That's the first question.
We know that this pilot was just launched, and we heard some comments from Magnit's management. But it's too early to see any effect or inputs. We'll, of course, pay attention, and we'll measure the effect of their stores on our stores. and I think it will be more appropriate to comment on that during the -- after probably the second half of the year. So far, it's just too -- they just started to open. It's just too early to judge.
Okay. And then my second question will be on this LTI program, which we commented previously. I mean, we all just heard about this multiple kind of leadership that is embedded in the -- as a target for your LTI, but there's a lot of factors which are actually affecting the multiples. Why didn't the Supervisory Board had been simply just focusing on the total shareholder return or like kind of that part of the metric? Because ultimately, I think if the returns are improving, that probably will actually drive your market capitalization up as well, while multiple could be a function of the different factors, including what's happening today, for example, with the macro, geopolitics and sanctions and so forth. So why did you choose this particular factor to target?
Let me start and Svetlana will proceed to answer from there. Your question first of all to trigger revenue -- to be leader in revenue multiple, we need to be #1 in Russian public company in this circumstance as all of our competitor in the same situation regarding the macroeconomic.
Yes, it's important to remember that both measures are comparative measures. So we need to be best among our competitors. And that's quite fair, I would say, from the Supervisory Board to expect from management.
And also, I think we -- to trigger that we have proportion 50-50, hence push up the management for the more balanced growth.
Okay. And what if this multiple leadership will be achieved not because of your improvement but because your competitors will simply have a multiple derating like we are seeing with Lenta, for example recently? So would be still then management eligible for the payment?
Well, that's life, and it's not maybe perfect. Yes, if we win, we win. Yes, we'll get a payment.
Sorry, colleagues. I just want to add that actually, there are 2 or more triggers in this LTI program. With regards to EBITDA margin, we should not sacrifice, yes. And net debt-to-EBITDA, we should be below 2, which is in line with our dividend policy. So yes, you should consider as combined with 2 main targets of the program.
Yes, to target and to trigger that Andrey just mentioned makes our LTI program quite balanced.
Okay. And I apologize for the small follow-up because on the Maryia Berasneva questions about the store openings. I realize that it's too early to provide '19 guidance, but just from your comments, Igor, you are saying that you are targeting a more balanced approach to the openings. Should we read that as going forward, we should probably see not higher openings or even lower number of openings in absolute terms going forward given that you're targeting more balanced approach? Should we read it like that?
I think we will give more guidance during our Capital Day that we invited all of you, yes. And it will be in the end of October, and we'll be ready to give you all guidance for the next year. At the moment, we are not ready to give guidance regarding openings of stores.
There being no further questions at this time, speaker, please continue.
Yes, yes.
And we've had another couple of question come through. And your next question is from Victoria Petrova from Crédit Suisse.
May I ask one follow-up question regarding potential benefits from your operating targets related, obviously, to operating costs and shrinkage, et cetera? How much -- how many basis points can you still extract from operating efficiency project theoretically maybe short term within 12 months and longer term? And my second question is related to competitive environment. You obviously were very vocal about specialist competition pressure, especially in Moscow. You're obviously addressing that. You mentioned how. Do you think that given that your key competitor is only launching their potential refurbishment program, that second quarter was probably the most relaxed one for you in terms of competitive environment and it will only get worse through the year? Or you're not seeing anything happening in the third quarter so far?
So yes, you're right. And Igor was talking about the initiatives we are doing in all our formats. And we do expect, I would say, the biggest impact on our financial results in Pyaterochka. It's hard to say at what period of time. We do expect some of the quick wins already starting to see in 2018. But of course, the biggest effects will come in 2019 and further. I think that the biggest impact will be in decreasing shrinkages and also through improving business process, working with personnel and increasing the involvement and decreasing turnover of personnel. So increasing the quality and NPS of the customers and impression of the customers in our stores. So that's probably answering the first question. For the second one, well, as you know, when [ we ] started their refurbishment program back in 2016 and -- well, since then, we are competing and reacting to their refurbishment program. I wouldn't say that the second quarter of this year was relaxed. Actually, if you look at the comparatives with our competitors, the benchmarks, you will see that you cannot call our results relaxed. They look quite impressive, I would say. So we're not relaxing. We're trying to be a very fast and to develop and trying to be as efficient as we can and as fast as we can. So of course, we understand that there will be more competitive pressure coming to us, but it's nothing new. We live in such an environment for many years already. So just continue to work. That's normal.
And if I may, just the very last follow-up question. Do you think that your customer demand has bottomed in the second quarter or cannot get any worse on your estimates, which are obviously much more precise than ours given that you see your data from the stores every day?
Well, if you look at the traffic numbers and NPS numbers, I would say that we see positive dynamic in terms of customer demand in the second quarter, and we think we're -- we hope to continue to see this. We also do expect a high season in the fourth quarter as usual. So it's hard to say. Why do you think that this amount bottomed like what...
I just hope it has. I just hope that there is no room for further deflation acceleration, but I might be wrong.
Well, actually, the prognosis of our internal macroeconomists say that we should expect some acceleration of inflation in the second half of the year. We do already see some acceleration in July. Because in July, it was 0.5%-plus, where in June, it was minus 0.2%. And also, we see some positive shelf inflation starting from end of July. Plus there are some of the factors related to the dynamics of harvests comparing this year and last year. So I would -- yes, I think we would expect that demand and inflation might accelerate, but we're being quite conservative about this in our prognosis.
Yes, colleagues, we'll take 2 last questions, please. Ladies and gentlemen, this concludes our presentation. So we are now ready -- sorry, ladies and gentlemen, this concludes our conference call today. Thank you very much for joining us on the call, and we look forward to speaking with you again at our Capital Markets Day on October 25, which this year will be in London. We'll circulate the invitations in the near future. Please do not hesitate to contact us if you require any further information. We appreciate your interest in our company, and we look forward to continued dialogue.
Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.